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standing order or direct debit?
Many of the complaints we get about regular payments wrongly describe a standing order as a ‘direct debit’, or a direct debit as a ‘standing order’. It’s maybe not too surprising that customers get the terms muddled up, because standing orders and direct debits do broadly the same thing, even though they work very differently. It doesn’t help, though, when bankers themselves sometimes describe them wrongly. Here's a brief explanation:
standing orders are customers’ instructions to their bank to pay a set amount, to a named beneficiary, at regular intervals (say on the 1st of the month) – either for a specific period of time or until cancelled.
direct debits are:
customers’ authority for beneficiaries to claim payments (variable in amount and frequency) from the customers’ accounts;
and customers’ instructions to their bank to allow the taking of those payments.
A standing order requires the customer’s bank to send the money. A direct debit requires the beneficiary to claim the money.
Typically, a standing order might be used to pay a fixed amount to a savings account or to a local club. A direct debit is more likely to be used to make payments that can vary from time to time – such as mortgage instalments or utility bills.
The day-to-day advantage of a direct debit over a standing order is that, as and when the payment amount changes, the beneficiary will claim the new amount automatically – after telling the customer of the change. With a standing order, customers need to give their bank new instructions each time a change is needed.
how the systems work
Standing orders can be simpler than direct debits – mainly because the beneficiary is not involved in claiming payments. At set times, the customer’s bank just sends the money to the beneficiary’s bank and only the customer can alter the payments. The beneficiary can be anyone.
In contrast, the variable nature of direct debits means that beneficiaries can claim different amounts at different times. This flexibility is the main advantage of the direct debit system – but there is a potential risk that unscrupulous or inefficient beneficiaries might claim money that is not due to them.
To combat this – and to reassure customers – the direct debit system contains two main safeguards:
The direct debit guarantee provides for the customer’s bank to refund disputed payments without question, pending further investigation. Direct debits can only be set up for payments to beneficiaries that are approved ‘originators’ of direct debits. In order to be approved, these beneficiaries are subjected to careful vetting procedures – and, once approved, they are required to give indemnity guarantees through their banks.
Usually, the customer has to sign a direct debit form, although some particularly trusted originators are authorised to set up direct debits where the customer has given authority over the phone. If that sounds a little risky, remember that the originator must have obtained the bank account details from the customer – and that the customer is protected by the direct debit guarantee.
Payments themselves are made by a system that is in some ways based on the cheque clearing system. This means that the process usually starts two working days before the money is due to reach the beneficiary’s bank account.
Direct debits are processed through BACS (Bankers’ Automated Clearing Services), as follows:
Day 1: BACS receives electronic details of all direct debit payments due on Day 3
Day 2: BACS sorts the information between banks and gives each bank a report of all payments due on Day 3
Day 3: Payments are made – the beneficiary’s bank account is credited, and the customer’s bank is debited
Just as with a cheque, a bank can ‘bounce’ a standing order or a direct debit if there’s not enough money in the customer’s account on Day 3 to cover it. And, in most circumstances, the customer can cancel, or ‘stop’, a standing order or a direct debit up to and during Day 3 – the day of payment.
recent trends and developmentsConsumers are making more and more use of standing orders and direct debits. Over the past couple of years, transaction numbers have gone up by about 12%. In fact, standing orders have seen something of a renaissance in recent years – with the increased use of internet banking making it easier not just to set them up, but also to keep them up-to-date.
Since late 2003, BACS has comprised two organisations:
BACS Limited – responsible for physically processing payments
and maintaining the payment network; and
BACS Payment Systems Limited – governing the rules under which payments are made, and responsible for maintaining and developing the integrity of payment schemes. It’s still too early to tell what effect this division of responsibility will have. But last year saw the beginning of a major upgrade to the system used to make payments – from telecoms-based to internet-based. This is due to be fully operational by 2005.
The principal advantage of an automated ‘regular payments’ system is that, if it all works correctly, the right payments are made at the right times without regular human intervention. But ironically, this is also its biggest potential weakness. If, at the outset, payment information is keyed wrongly into the bank’s system, then payments will be made wrongly and will continue to be made wrongly until someone spots the mistake. Often, it will be the customer, not the bank, who discovers the problem – maybe many months afterwards, and sometimes only once the person who was expecting the money has complained that they’ve not received it.
The Item is date 2004 and so the basic information is correct although I am expecting them to update it when faster payments comes in next May
standing order or direct debit?
Many of the complaints we get about regular payments wrongly describe a standing order as a ‘direct debit’, or a direct debit as a ‘standing order’. It’s maybe not too surprising that customers get the terms muddled up, because standing orders and direct debits do broadly the same thing, even though they work very differently. It doesn’t help, though, when bankers themselves sometimes describe them wrongly. Here's a brief explanation:
standing orders are customers’ instructions to their bank to pay a set amount, to a named beneficiary, at regular intervals (say on the 1st of the month) – either for a specific period of time or until cancelled.
direct debits are:
customers’ authority for beneficiaries to claim payments (variable in amount and frequency) from the customers’ accounts;
and customers’ instructions to their bank to allow the taking of those payments.
A standing order requires the customer’s bank to send the money. A direct debit requires the beneficiary to claim the money.
Typically, a standing order might be used to pay a fixed amount to a savings account or to a local club. A direct debit is more likely to be used to make payments that can vary from time to time – such as mortgage instalments or utility bills.
The day-to-day advantage of a direct debit over a standing order is that, as and when the payment amount changes, the beneficiary will claim the new amount automatically – after telling the customer of the change. With a standing order, customers need to give their bank new instructions each time a change is needed.
how the systems work
Standing orders can be simpler than direct debits – mainly because the beneficiary is not involved in claiming payments. At set times, the customer’s bank just sends the money to the beneficiary’s bank and only the customer can alter the payments. The beneficiary can be anyone.
In contrast, the variable nature of direct debits means that beneficiaries can claim different amounts at different times. This flexibility is the main advantage of the direct debit system – but there is a potential risk that unscrupulous or inefficient beneficiaries might claim money that is not due to them.
To combat this – and to reassure customers – the direct debit system contains two main safeguards:
The direct debit guarantee provides for the customer’s bank to refund disputed payments without question, pending further investigation. Direct debits can only be set up for payments to beneficiaries that are approved ‘originators’ of direct debits. In order to be approved, these beneficiaries are subjected to careful vetting procedures – and, once approved, they are required to give indemnity guarantees through their banks.
Usually, the customer has to sign a direct debit form, although some particularly trusted originators are authorised to set up direct debits where the customer has given authority over the phone. If that sounds a little risky, remember that the originator must have obtained the bank account details from the customer – and that the customer is protected by the direct debit guarantee.
Payments themselves are made by a system that is in some ways based on the cheque clearing system. This means that the process usually starts two working days before the money is due to reach the beneficiary’s bank account.
Direct debits are processed through BACS (Bankers’ Automated Clearing Services), as follows:
Day 1: BACS receives electronic details of all direct debit payments due on Day 3
Day 2: BACS sorts the information between banks and gives each bank a report of all payments due on Day 3
Day 3: Payments are made – the beneficiary’s bank account is credited, and the customer’s bank is debited
Just as with a cheque, a bank can ‘bounce’ a standing order or a direct debit if there’s not enough money in the customer’s account on Day 3 to cover it. And, in most circumstances, the customer can cancel, or ‘stop’, a standing order or a direct debit up to and during Day 3 – the day of payment.
recent trends and developmentsConsumers are making more and more use of standing orders and direct debits. Over the past couple of years, transaction numbers have gone up by about 12%. In fact, standing orders have seen something of a renaissance in recent years – with the increased use of internet banking making it easier not just to set them up, but also to keep them up-to-date.
Since late 2003, BACS has comprised two organisations:
BACS Limited – responsible for physically processing payments
and maintaining the payment network; and
BACS Payment Systems Limited – governing the rules under which payments are made, and responsible for maintaining and developing the integrity of payment schemes. It’s still too early to tell what effect this division of responsibility will have. But last year saw the beginning of a major upgrade to the system used to make payments – from telecoms-based to internet-based. This is due to be fully operational by 2005.
The principal advantage of an automated ‘regular payments’ system is that, if it all works correctly, the right payments are made at the right times without regular human intervention. But ironically, this is also its biggest potential weakness. If, at the outset, payment information is keyed wrongly into the bank’s system, then payments will be made wrongly and will continue to be made wrongly until someone spots the mistake. Often, it will be the customer, not the bank, who discovers the problem – maybe many months afterwards, and sometimes only once the person who was expecting the money has complained that they’ve not received it.
The Item is date 2004 and so the basic information is correct although I am expecting them to update it when faster payments comes in next May
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